Class 1 Violations
What ALL ORIGINATING COMPANIES and THIRD PARTY SENDERS need to be reminded of is what is now classified as the Class 1 Rules violation. The Class 1 violation is a nuisance type of violation that reflects a lack of quality of processing and creates extra work for receiving financial institutions. Fines can begin being assessed when an ODFI has received a repeat violation for the same originating entity that continues to send incorrect entries. A classic example of a rules violation is illustrated in this chain of events:
If a second rules violation for the same originating entity and same reason are filed, then the ODFI will receive a Notice of Possible Fine from NACHA. The ODFI has 10 banking days to acknowledge and state its case if it believes the violation is not warranted.
If the NACHA Rules Enforcement Panel determines there was a second rule violation, then the ODFI will be fined an amount up to $1,000. For a third rule violation, or what the Rules state is a second recurrence, the fine can be up to $2,500. If there is a fourth recurrence of the same rule violation on the same originator, then the fine can be an amount as high as $5,000. Keep in mind that a series of repetitive rule violations, (i.e., the fourth or even a subsequent fifth, etc.) could move you quickly from a Class 1 to a Class 2 violation where the fine can be up to $100,000 per month.
Class 2 and Class 3 Violations
With Class 2 and 3 violations, NACHA has articulated that they will eliminate 'bad' debit originators by fining their ODFIs so that it is financially detrimental to process for debit originators with a high rate of unauthorized debits. NACHA knows which ODFIs and respective originating companies are perpetuating excessive return rates for the 'unauthorized' reason codes. Up until now, the existing Rules enforcement and fine structure prevented NACHA from halting these ODFIs and the originating companies by association from processing. Under the new enforcement Rules, ODFIs that are cited will be obligated to supply NACHA with detailed information about their debit originators. These same originating financial institutions will have a certain time period to remedy the return rate with their originating company before potentially receiving a Class 2 fine of up to $100,000 per month. In the case where a Class 2 violation continues for three consecutive months, the classification can then be deemed a Class 3 violation and the fine to the ODFI could be as high as $500,000 per month. Although the new Rules are now in effect, the section of the Rules that obligates an ODFI to supply detailed information about its originating companies or third-party senders who exceed defined thresholds for unauthorized debit returns, will not take effect until March 21, 2008.
How to Avoid NACHA Rules Violations
The best way to avoid receiving violations is to ensure that you follow the following procedures:
You can learn more about NACHA's Appendix Eleven - Network Rules Enforcement by ordering the 2008 ACH Rules on CD-ROM from your PNC Treasury Management Officer.